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State and federal regulators today announced agreements that resolve pending litigation and investigations of fraud, bid-rigging and improper accounting by the nation’s largest insurance company.
Under the agreements, American International Group (AIG) has acknowledged misconduct, adopted a series of groundbreaking reforms and agreed to pay more than $1.6 billion in restitution and penalties.
The agreements were announced simultaneously by the New York Attorney General, the New York Insurance Department, the Securities and Exchange Commission (SEC) and the United States Department of Justice.
“AIG was and is a solid company that didn’t need to cheat,” commented N.Y. Attorney General Eliot Spitzer. “It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators. However, by changing management, implementing reforms and providing restitution to injured investors, customers and states, the company has placed itself on a path toward resurgence.”
Howard Mills, State Insurance Superintendent, credited the current management of AIG with taking corrective action. “AIG has today acknowledged that the company over a period of years intentionally misled investors, regulators and policyholders about the company’s financial condition and operations,” Mills said. “We’re pleased that AIG is making amends to all those who were adversely affected by its conduct and applaud the current management team’s willingness to reform their financial reporting and corporate governance practices. We are confident that these steps will allow AIG to remain one of the world’s premier financial services companies.”
In the fall of 2004, the Attorney General’s office and the Insurance Department began investigating AIG for bid-rigging as part of an ongoing probe of misconduct in the insurance industry. Before today, that probe had resulted in more than $1 billion in restitution to policyholders and guilty pleas from 20 insurance company executives and officers, including four former AIG employees.
In early 2005, the Attorney General, the Insurance Department and the SEC began jointly investigating a series of allegedly fraudulent transactions by AIG and its senior officers, including a sham transfer of “loss reserves” from the General Re Corporation (Gen Re) to AIG in late 2000 and early 2001 to bolster the public view of AIG’s underwriting performance.
On May 26, 2005, the Attorney General and the Insurance Superintendent sued AIG and its former Chairman and CEO and Chief Financial Officer for violations of New York’s Martin Act and other state laws in connection with: (i) the Gen Re transaction and other efforts to inflate reserves; (ii) other transactions designed to conceal underwriting losses by converting them into capital losses; (iii) misleading the New York Insurance Department about offshore AIG affiliates; and (iv) improper reporting of workers’compensation premiums.
In a federal indictment announced last week, a Virginia grand jury charged four former senior officers at Gen Re and AIG with fraud and said other “senior level executives at AIG” were co-conspirators.
Today’s SEC resolution addresses many of the transactions described in New York’s lawsuit. As part of that resolution, the SEC filed a complaint and consent judgement alleging that for at least five years AIG “materially falsified financial statements through a variety of sham transactions and entities whose purpose was to paint a falsely rosy picture of [the company’s] financial results to analysts and investors.”
In a statement today, AIG acknowledged that it was wrong to provide incorrect information to the investing public and regulators and that it “regrets and apologizes” for its conduct. Since the investigation began, AIG has also restated its earnings by more than $3.5 billion.
Under today’s agreements, $800 million will go to investors deceived by false financial statements, $375 million to AIG policyholders harmed by bid rigging activities and $344 million to states harmed by AIG’s practices between 1986 and 1995 involving workers’ compensation funds. In addition, New York and the SEC have each assessed $100 million in penalties against the company. The SEC’s penalty will go into the fund for investors.
Among the reforms in today’s agreement, AIG will sharply curtail the use of “contingent commissions.” It will pay no contingent commissions in excess casualty lines of insurance through 2008. In addition, AIG has agreed to stop paying such commissions in any line of insurance where companies with 65 percent of gross written premiums do not do so. The company has also agreed to support legislation banning contingent commissions and requiring greater disclosure of compensation to brokers and agents. It will be providing new disclosures about ranges of compensation paid to brokers and agents by insurance product on a special web site later this year.
The agreement also provides for additional reinsurance reporting obligations by AIG to the Insurance Department and monitoring of financial reporting and corporate governance practices by the Insurance Department and the SEC.
Today’s agreement with the company does not resolve the pending case against the company’s former Chairman and Chief Executive Officer, Maurice R. “Hank” Greenberg, and its former Chief Financial Officer, Howard Smith.
As a result of these settlements, AIG will make payments totaling approximately $1.64 billion. A substantial portion of the monies will be available to resolve claims asserted in various regulatory and civil proceedings, including shareholder lawsuits.
Specifically, AIG will pay $800 million, including $100 million as a penalty, into a fund under the supervision of the SEC to be available to make payments to investors, including investors involved in shareholder litigation relating primarily to AIG’s accounting and
financial reporting practices. Another $375 million will be paid into a fund under the supervision of the NYAG and the DOI to be available principally to pay certain AIG insureds who purchased excess casualty policies through Marsh Inc. In addition, approximately $343 million will be used to compensate each of the 50 states in connection with the underpayment of certain workers compensation premium taxes and other assessments. Finally, the payments include a fine of $100 million to the State of New York and $25 million in connection with the DOJ settlement.
In a statement commenting on today’s announcement, AIG President and Chief Executive Officer Martin J. Sullivan said, “It was important that we resolve these outstanding investigations by the DOJ, SEC, NYAG and DOI. AIG has fully cooperated with these authorities throughout their investigations, and we will continue to do so.” Sullivan continued, “These settlements are a major step forward in resolving the legal and regulatory issues facing AIG. We have already implemented a wide range of improvements in our accounting, financial reporting and corporate governance, and will continue to make enhancements in these areas. AIG is committed to business practices that provide transparency and fairness in the insurance markets.”
Frank G. Zarb, Chairman of AIG’s Board of Directors, added, “The AIG Board believes that these settlements are in the best interest of the company. We support management in its ongoing commitment to enhanced accounting, financial reporting and corporate governance.”
As part of its settlements, AIG has agreed to retain for a period of three years an Independent Consultant who will conduct a review that will include the adequacy of AIG’s internal controls over financial reporting and the remediation plan that AIG has implemented as a result of its own internal review.
AIG said it will continue to cooperate with all other pending investigations. General Insurance Reserve Evaluation As announced previously, AIG commissioned Milliman Inc. (Milliman) to provide
an independent, comprehensive review of the loss reserves of AIG’s principal propertycasualty insurance operations, including an independent ground up study of AIG’s asbestos and environmental (A&E) exposures. The Milliman review encompassed nearly all of
AIG’s carried loss reserves, other than those pertaining to the operations of Transatlantic Holdings Inc. and 21st Century Insurance Group.
After carefully considering the results of the Milliman review and AIG’s own actuarial analyses, AIG said it will take a fourth quarter 2005 after-tax charge to net income of approximately $1.10 billion, relating to an increase to its net reserve for loss and loss expenses of approximately $1.69 billion, or approximately 3 percent of its total net General Insurance loss and loss expense reserves. This net reserve increase comprises approximately $820 million for non A&E reserves and approximately $870 million for A&E reserves.
AIG will hold a conference call for the investment community Thursday at 5 p.m. EST. The call will be broadcast live on the internet at www.aigwebcast.com.
Sources: NY Attorney General. AIG
Editor’s note: See other AIG news in National news.